SIPPs - flying solo

Personal pensions first appeared in 1988. In the following year the then Chancellor Nigel Lawson introduced the concept of self invested personal pension schemes (SIPPs), allowing people to take control of their pension investments. SIPPs are subject to all of the normal personal pension rules on contributions and benefits, but there are a number of key differences.

Tax legislation defines a SIPP as an 'investment regulated pension scheme', meaning it must meet the condition that the member (or a person related to them) can direct, influence or advise the way that money is invested in the plan.

The FSA's Handbook Glossary describes a SIPP as "an arrangement which forms all or part of a personal pension scheme which gives the member the power to direct how some or all of the member's contributions are invested."

With their wide investment choice, SIPPs are traditionally aimed at people who want to manage their own pension fund and buy and switch investments as they choose. SIPPs usually have higher charges than other personal pensions, so are generally more suited to larger funds and experienced investors.

SIPP structures

There are a number of different ways to set up a SIPP. Probably the most common structure is a personal pension scheme under a master trust with one corporate trustee who is the legal owner of the scheme's assets.

An alternative is to use a series of individual trusts where the member is co trustee. This is similar to a SSAS and gives the member the power to sign for investment deals, among other similarities.

A third structure is to set up a SIPP as a fully insured personal pension scheme. These are often referred to as private funds or self managed funds. Here the provider buys assets on the member's direction, then issues a unit linked policy reflecting the value of the investments. Fully insured SIPPs are governed by legislation applying to life assurance company investments as well as SIPP legislation.

Permissible investments

The 2001 Personal Pension Schemes Regulations included a definitive list of SIPP investments:

• Stocks and shares listed or dealt on an Inland Revenue recognised stock exchange (including AIM but not OFEX);

• Futures and options, relating to stocks and shares, traded on a recognised futures exchange

• Depositary interests;

• Eligible shares within the meaning of section 638(11) of the regulations;

• Units in an authorised unit trust scheme;

• Shares in an open ended investment company;

• Interests in most collective investment schemes;

• Contracts or insurance policies linked to insurance company managed funds;

• Traded endowment policies;

• Deposits in any currency held in deposit accounts;

• Freehold or leasehold interest in commercial property (including land) where the interest is acquired from any person other than a member of the scheme or connected.

Few providers offer all the permissible investments, provoking discussion as to whether there should be a set definition so that only products offering the full range can call themselves SIPPs. So far nothing has changed.